I don’t know much about economics. It’s all voodoo to me. Unfortunately, the same appears to be true of the corporate bosses of Bear Stearns, the “hallowed” investment bank that was sold over the weekend for pennies on the dollar to JPMorgan Chase. That was made possible by a thirty billion (“B” billion, not “M” million) dollar hand-out from the United States Federal Reserve Bank to cover Bear Stearns assets that would be “difficult” to sell off, meaning the U.S taxpayer will be stuck holding that bag.
“How could this happen?!” Actually, how could it not? Bear Stearns, along with a lot of other investment banks, were using “mortgage based securities.” Essentially, as I understand it, they lent the money to the guys lending the money to the people who were buying homes. Mortgages. They issued and traded bonds that used these mortgages to secure the money for the people who bought the securities. So long as those mortgages were prudent, it was not necessarily a bad idea.
However, the guys making the mortgages invented a new category – sub-prime mortgages. Many of those mortgages were given to people who didn’t have the funds really to make the payments and weren’t going to have them. That’s okay. Just re-finance! And the “worth” of the houses being bought kept going up and up. Anyone with half a brain knew that the housing market was WAAAAAY over-priced. It was crazy.
The reason the houses and land were worth that much was because everyone agreed they were. They believed it as deeply as any Born Again Christian grabs hold of the Bible. The loaves and the fishes with which Jesus fed the multitude didn’t multiply as much or as fast as some of the housing prices. It had to be true. Shout down the un-believers and naysayers. Except, of course, it all wasn’t true.